AGF Management Limited Reports Third Quarter 2016 Financial Results

  • Total assets under management increased 2.9% compared to prior year
  • Adjusted EPS from continuing operations increased to $0.13

TORONTO, Sept. 28, 2016 /CNW/ - AGF Management Limited (AGF or the Company) today announced financial results for the third quarter ended August 31, 2016. Total assets under management (AUM) increased to $34.2 billion, compared to $33.7 billion as at May 31, 2016 and $33.3 billion as at August 31, 2015. Market growth combined with the trend of lower retail redemptions and AUM growth in our alternative asset management platform contributed to improved AUM levels. Total retail fund AUM was $17.8 billion as at August 31, 2016, compared to $17.5 billion as at May 31, 2016 and $18.2 billion as at August 31, 2015. Institutional and sub-advisory AUM was $11.0 billion as at August 31, 2016, compared to $11.1 billion as at May 31, 2016 and $10.5 billion as at August 31, 2015. Private client AUM was $4.8 billion, compared to $4.6 billion as at May 31, 2016 and $4.4 billion as at August 31, 2015.

"We remain focused on delivering strong long-term investment performance and exceptional service to our clients while improving sales and increasing overall AUM," said Blake C. Goldring, Chairman and Chief Executive Officer, AGF Management Limited.

For the three-year period ended August 31, 2016, 47% of ranked AUM performed above median, compared with 48% for the three-year period ended August 31, 2015.

"Focus on client needs will be a key factor as we shape our business for the future," said Kevin McCreadie, President and Chief Investment Officer, AGF Investments Inc. "We strive to deliver strong long-term capital growth and downside protection in order to deliver on our client's expectations for more consistent and repeatable outcomes."

Income from continuing operations for the third quarter of 2016 adjusted for a one-time charge of $2.1 million related to the Company's share of a tax levy recorded by Smith and Williamson Holdings Limited (S&WHL) was $111.5 million. Income from continuing operations for the third quarter of 2015 adjusted for a one-time special distribution of $5.7 million was $110.1 million. Earnings before interest, taxes, depreciation and amortization (EBITDA) from continuing operations was $25.3 million in the third quarter of 2016, compared to $31.8 million in the third quarter of 2015.

Diluted earnings per share (EPS) from continuing operations was $0.10 for the three months ended August 31, 2016, compared to $0.14 for the three months ended August 31, 2015. Adjusted diluted EPS from continuing operations was $0.13 for the three months ended August 31, 2016. Adjusted diluted EPS from continuing operations for the three months ended August 31, 2015 was $0.12. In addition to the special distribution, the results for the three months ended August 31, 2015 included one-time restructuring costs of $4.4 million. During the nine months August 31, 2016, we also recognized $1.5 million of one-time fund custody and accounting transition costs. Adjusted diluted EPS from continuing operations was $0.39 for the nine months ended August 31, 2016. Adjusted diluted EPS from continuing operations for the nine month period ended August 31, 2015 was $0.46.

For the three months ended August 31, 2016, AGF declared an eight cent per share dividend on Class A Voting common shares and Class B Non-Voting shares, payable October 18, 2016 to shareholders on record as at October 11, 2016.

Conference Call

AGF will host a conference call to review its earnings results today at 11 a.m. ET. The live audio webcast with supporting materials will be available in the Investor Relations section of AGF's website at www.agf.com or at http://edge.media-server.com/m/p/jb74jdjx. Alternatively, the call can be accessed toll-free in North America by dialing 1-800-708-4540 (Passcode #: 43406461).

A complete archive of this discussion along with supporting materials will be available at the same webcast address within 24 hours of the end of the conference call.

ABOUT AGF MANAGEMENT LIMITED

AGF Management Limited is one of Canada's premier independent investment management firms with offices across Canada and subsidiaries around the world. AGF's products include a diversified family of mutual funds, mutual fund wrap programs, pooled funds and an alternative asset management platform. AGF also manages assets on behalf of institutional investors including pension plans, sovereign wealth funds, foundations and endowments as well as for private clients. With approximately $34 billion in total assets under management, AGF serves more than one million investors. AGF trades on the Toronto Stock Exchange under the symbol AGF.B.

Caution Regarding Forward-Looking Statements

This Management's Discussion and Analysis (MD&A) includes forward-looking statements about the Company, including its business operations, strategy and expected financial performance and condition. Forward-looking statements include statements that are predictive in nature, depend upon or refer to future events or conditions, or include words such as 'expects,' 'anticipates,' 'intends,' 'plans,' 'believes' or negative versions thereof and similar expressions, or future or conditional verbs such as 'may,' 'will,' 'should,' 'would' and 'could.' In addition, any statement that may be made concerning future financial performance (including income, earnings or growth rates), ongoing business strategies or prospects, and possible future action on our part, is also a forward-looking statement. Forward-looking statements are based on certain factors and assumptions, including expected growth, results of operations, business prospects, business performance and opportunities. While we consider these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are based on current expectations and projections about future events and are inherently subject to, among other things, risks, uncertainties and assumptions about our operations, economic factors and the financial services industry generally. They are not guarantees of future performance, and actual events and results could differ materially from those expressed or implied by forward-looking statements made by us due to, but not limited to, important risk factors such as level of assets under our management, volume of sales and redemptions of our investment products, performance of our investment funds and of our investment managers and advisors, pipeline, competitive fee levels for investment management products and administration, and competitive dealer compensation levels and cost efficiency in our investment management operations, as well as interest and foreign-exchange rates, taxation, changes in government regulations, unexpected judicial or regulatory proceedings, and our ability to complete strategic transactions and integrate acquisitions. We caution that the foregoing list is not exhaustive. The reader is cautioned to consider these and other factors carefully and not place undue reliance on forward-looking statements. Other than specifically required by applicable laws, we are under no obligation (and expressly disclaim any such obligation) to update or alter the forward-looking statements, whether as a result of new information, future events or otherwise. For a more complete discussion of the risk factors that may impact actual results, please refer to the 'Risk Factors and Management of Risk' section of the 2015 Annual MD&A.

AGF Management Limited
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For the three and nine months ended August 31, 2016 and 2015

Summary of Quarterly Results
(from continuing operations)










(in millions of Canadian dollars, except per share amounts)


Aug. 31,


May 31,


Feb. 29,


Nov. 30,

Three months ended


2016


2016


2016


2015










Income1

$

109.4

$

111.1

$

103.3

$

105.0

Expenses3,4,5


84.1


84.9


76.0


79.5

EBITDA6


25.3


26.2


27.3


25.5

Pre-tax income


10.3


11.8


12.9


10.3










Net income attributable to equity owners of the Company


8.2


9.6


10.2


8.1










Earnings per share attributable to equity owners










of the Company











Basic

$

0.10

$

0.12

$

0.13

$

0.11



Diluted


0.10


0.12


0.13


0.11










Free cash flow4.6


12.9


16.4


11.1


18.6

Dividends per share


0.08


0.08


0.08


0.08

Total long-term debt


228.0


228.9


268.9


268.8










Weighted average basic shares


79,296,221


79,252,324


79,449,122


82,532,707

Weighted average fully diluted shares


80,306,141


80,097,391


79,485,581


83,663,389

(in millions of Canadian dollars, except per share amounts)


Aug. 31,


May 31,


Feb. 28,


Nov. 30,

Three months ended


2015


2015


2015


2014










Income2

$

115.8

$

117.1

$

111.7

$

111.7

Expenses3,4


84.0


81.1


77.8


77.3

EBITDA6


31.8


36.0


33.9


34.4

Pre-tax income


15.9


19.6


18.1


16.7










Net income attributable to equity owners of the Company


11.9


14.7


13.6


12.6










Earnings per share attributable to equity owners










of the Company











Basic

$

0.14

$

0.17

$

0.16

$

0.15



Diluted                                                                     


0.14


0.17


0.16


0.14










Free cash flow4,6


17.0


16.8


15.4


22.0

Dividends per share


0.08


0.08


0.27


0.27

Total long-term debt


268.7


268.6


268.5


308.2










Weighted average basic shares


82,826,845


84,489,294


84,644,212


85,812,669

Weighted average fully diluted shares


83,814,065


85,426,944


85,447,450


87,000,054

Includes a $2.1 million charge in income related to the Company's share of a one-time tax levy for Smith and Williamson Holdings Limited for the three months ended August 31, 2016.

Includes a $5.7 million special distribution from a long-term investment for the three months ended August 31, 2015.

Includes selling, general and administrative (SG&A), trailing commissions and investment advisory fees.

Includes one-time restructuring costs of $2.8 million and $4.4 million for the three months ended November 30, 2015 and August 31, 2015, respectively.

5  

Includes one-time costs of $1.5 million related to fund custody and accounting transition costs for the three months ended May 31, 2016.

6

See 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis (MD&A) is as of September 27, 2016, and presents an analysis of the financial condition of AGF Management Limited (AGF or the Company) and its subsidiaries for the three- and nine-month period ended August 31, 2016, compared to the three- and nine-month period ended August 31, 2015. The MD&A should be read in conjunction with our unaudited Condensed Consolidated Interim Financial Statements for the three and nine months ended August 31, 2016 and our 2015 Annual Report. The financial statements for the three and nine months ended August 31, 2016, including required comparative information, have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting, unless otherwise noted.

We also utilize non-IFRS financial measures to assess our overall performance. Details of non-IFRS measures used are outlined in the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section, which provides calculations of the non-IFRS measures.

All dollar amounts are in Canadian dollars unless otherwise indicated. Throughout this discussion, percentage changes are calculated based on numbers rounded to the decimals that appear in this MD&A. Results, except per share information, are presented in millions of dollars. Certain totals, subtotals and percentages may not reconcile due to rounding.

There have been no material changes to the information discussed in the following sections of the 2015 Annual MD&A: 'Risk Factors and Management of Risk,' 'Contractual Obligations' and 'Intercompany and Related Party Transactions.'

Our Business and Strategy

AGF, with $34.2 billion in assets under management (AUM) as at August 31, 2016, is one of the largest independent Canadian-based investment management firms, with operations and investments in Canada, the United States, the United Kingdom, Ireland and Asia. The origin of our Company dates back to 1957 with the introduction of the American Growth Fund, the first mutual fund available to Canadians seeking to invest in the United States.

We believe that superior investment performance and product innovation are key to our success. Our target is to consistently have 50% of our ranked AUM above median over one year and 60% above median over three years. For the one-year period ended August 31, 2016, 35% of ranked AUM performed above median, compared with 45% in 2015. For the three-year period ended August 31, 2016, 47% of ranked AUM performed above median, compared with 48% in 2015.

We also believe in diversification, both in terms of investment styles and product solutions offered to our clients in each of the segments in which we operate. AGF offers individuals and institutions a broad array of investment strategies and solutions across four investment management platforms:

  • Fundamental Active Management
  • Quantitative Solutions
  • Private Client
  • Alternative Assets

Fundamental Active Management
AGF's fundamental actively managed platform includes a broad range of equity and fixed income strategies, managing total AUM of $24.1 billion. Within this platform, we have a number of centres of excellence, including our Global, North American, Fixed Income teams and our Asset Allocation committee, located in Toronto, Dublin and Singapore. This platform delivers products to retail, institutional investors and strategic partners.

We have strong capability and performance within the global space and we intend to leverage this strength as part of our growth strategy. Our marketing efforts are focused on promoting this team and their capabilities to investors.

Our Asset Allocation team has been instrumental in delivering superior performance within our balanced products, in particular, AGF Elements, which continues to produce strong net sales for the Company.

We continually review our product offering with an aim to provide our advisors and clients a product platform that offers innovative solutions around specific needs, ultimately resulting in organic AUM growth for the Company and superior, consistent investment returns to our clients. In May 2016, we completed several fund mergers with the goal of streamlining our product lineup and providing greater focus on our key strategies and capabilities. During the second quarter, we also implemented management fee reductions on select funds across the equity, fixed income, balanced and managed solutions lineup effective April 1, 2016.

Quantitative Solutions
Our quantitative solutions platform known as QuantShare Advisor includes Highstreet Asset Management Inc. (Highstreet), located in London, Ontario, and FFCM, LLC (FFCM), located in Boston, with a total of 24 investment professionals managing AUM of approximately $4.7 billion.

Highstreet's investment foundation is empirically based research and the combination of quantitative and fundamental investing. All of its research and analysis is done internally, backed by an investment team with a diverse skill set ranging from scientists to academics to traditional fundamental analysts. 

In November 2015, we acquired a majority interest in FFCM, a U.S.-based advisor that manages factor-based exchange traded funds (ETF) and ETF solutions. FFCM has the capability to manage the Investment Company Act of 1940 registered products, separately managed accounts, and hedge funds in direct or sub-advisory relationship models and have obtained ETF Securities and Exchange Commission (SEC) exemptive relief, which allows them to offer long and short products. FFCM provides us with a complete trading infrastructure to support ETFs and related mutual fund products. Beyond trading capabilities, FFCM has developed and launched five ETFs into the U.S. market with performance success and offers ETF solutions. With our expertise and capabilities within QuantShare Advisor, we have filed a preliminary prospectus in September 2016 with the goal to launch risk-oriented solutions in Canada and the United States to address increasing investor demand in low volatility and factor-based investing.

Private Client
The private client industry in Canada includes bank-owned firms, as well as large independent firms and boutiques, who continue to retain a significant portion of market share. Our private client platform, which includes Cypress Capital Management Limited (Cypress), located in Vancouver, Doherty & Associates Ltd. (Doherty), with offices in Ottawa and Montreal, and Highstreet, located in London, Ontario, provides solutions for high-net-worth individuals, endowments, and foundations in key markets across Canada. These businesses manage total private client AUM of approximately $4.8 billion, representing growth over the past five years of 39.4%.

Alternative Assets
Global economic uncertainty in recent years is driving increasing demand from institutional and individual investors for more stable and sustainable long-term investment returns, including allocating to alternative asset classes such as real assets. These assets, which are physical or tangible in nature, have historically demonstrated a low correlation to the public markets.

In 2014, as part of our capital reallocation strategy, we formed InstarAGF Inc. (InstarAGF), a joint venture with Instar Group Inc. (Instar) to develop an alternative asset management platform. AGF holds a 50.0% economic interest in InstarAGF and has also committed equity of $150.0 million to this platform. As alternative assets continue to grow in prominence and represent a greater proportion of institutional portfolios, AGF is well positioned to deliver the long-duration, risk-adjusted solutions institutional, retail and high-net-worth investors are seeking to generate predictable cash flow and meet long-dated liabilities.

InstarAGF is an independent alternative asset management firm with an emphasis on real assets, including infrastructure investments, in the North American middle market. InstarAGF's long-term objective is to develop and manage diversified alternative investment products for institutional and individual investors, which, in addition to infrastructure, could include timber or agriculture and other private equity investments, among others. InstarAGF's team of professionals has more than 100 years of combined investment and asset management expertise in the private capital industry, including infrastructure, private equity and real estate investments.

AGF's $150.0 million of committed equity includes a $100.0 million commitment in the flagship InstarAGF Essential Infrastructure Fund (EIF), which invests in energy, utilities, civil and social infrastructure assets in Canada and the United States, and a $50.0 million commitment to a Canadian midstream oil and gas fund managed by Stream Asset Financial Management LP (SAFMLP).

Through its ownership interest in InstarAGF and its 37.0% interest in SAFMLP, AGF will earn recurring management fees on these entities' assets under management along with a share of net profit as the alternatives platform achieves scale. Through its investment as a limited partner in the various funds managed by InstarAGF and SAFMLP, AGF expects to earn attractive risk-adjusted returns comprising of income and capital appreciation.

On March 2, 2016, InstarAGF and AGF achieved the first close of EIF with a number of institutional and high-net-worth investors from Canada, Europe, the United Kingdom and the United States. Following the first close, AGF received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund.

On August 19, 2016, as a result of a subsequent close, AGF received $14.1 million as a return of capital to bring the Company's invested capital in line with its proportionate share of total commitments.

As at August 31, 2016, investors, including AGF, had committed aggregate equity of $457.0 million to EIF, which has a targeted fund size of $750.0 million and is currently expected to close by the end of 2016.

Other Businesses
In addition to our investment management platforms outlined above, we hold a 32.5% interest in Smith & Williamson Holdings Limited (S&WHL), a leading independent private client investment management, financial advisory and accounting group based in the U.K. S&WHL is one of the top 10 largest chartered accountancy firms in the U.K. and its investment management business has over $30.9 billion (£17.4 billion) of funds under management and advice as at August 31, 2016.

On February 16, 2016, AGF internalized the Company's fund administration function. The fund administration business provides services to the AGF mutual funds.

Our Distribution Channels

Retail
Our sales teams manage advisor and strategic account relationships for our retail business, which provides investment management products to the retail and strategic sub-advisory channel. We have regional sales offices across Canada. AGF's wholesaler teams cover over 35,000 external advisors and 200 investment dealers in support of our retail products. We have a number of key partnerships that provide us with a large and robust distribution channel in which to deliver our products to investors. During the three months ended August 31, 2016, retail fund net redemptions improved 25.0% to $0.3 billion compared to net redemptions of $0.4 billion for the same period last year.

Institutional
We have a global network of salespeople covering North America, Europe and Asia. AGF also participates in an investment consultant relations program and has earned buy ratings from a number of major firms. Investment consultants act as gatekeepers in the industry, and advise their clients on issues such as asset allocation and manager selection. This constituency is important, as a buy rating from a major consultant can lead to an increased number of request for proposal (RFP) searches, which in turn enhances the chance of winning new business. Our key competencies in global equities are aligned with market trends, namely the need for reducing home country bias and investing globally. We also distribute products managed by our alternative platform within InstarAGF to North American and international financial institutions and asset managers through this channel.

We define the institutional pipeline as client commitments to fund or redeem a portion or all of their account. As at the date of this MD&A, AGF had a net pipeline of $60.0 million in sales. This represents forward-looking information. Commitments are not necessarily contractual obligations. Actual amounts funded or redeemed may vary. 

Summary of Key Financial and AUM Results for the Third Quarter of 2016:

For the period ended August 31, 2016, AUM was $34.2 billion, increasing $1.0 billion from August 31, 2015. The increase was due to improved flows, higher alternative AUM, and positive markets. Included in adjusted income for the three months ended August 31, 2016 and August 31, 2015 is one-time charge of $2.1 million related to AGF's share of a tax levy recorded by S&WHL and a special distribution of $5.7 million received from a long-term investment, respectively. In addition to these adjustments is a $4.4 million one-time restructuring charge for the three months ended August 31, 2015. Adjusted EBITDA from continuing operations was $27.4 million, compared to $30.5 million in 2015. Adjusted diluted EPS was $0.13 per share, compared to $0.12 for the corresponding period in 2015. Refer to page 9 for additional information on one-time adjustments.

Assets Under Management













Three months ended


August 31,


May 31,

February 29,

November 30,

August 31,

(in millions of Canadian dollars)


2016


2016


2016


2015


2015












Retail fund AUM (including retail pooled funds),












beginning of period

$

17,539

$

16,853

$

18,030

$

18,215

$

19,355













Gross sales1


344


431


534


458


413


Redemptions1


(647)


(713)


(846)


(707)


(828)


Net redemptions


(303)


(282)


(312)


(249)


(415)













Market appreciation (depreciation) of fund portfolios

$

575

$

968

$

(865)

$

64

$

(725)












Retail fund AUM (including retail pooled funds),












end of period

$

17,811

$

17,539

$

16,853

$

18,030

$

18,215












Average daily retail fund AUM for the period

$

17,682

$

17,376

$

17,327

$

17,964

$

18,967












Institutional and sub-advisory accounts AUM,












beginning of period

$

11,087

$

10,405

$

10,867

$

10,461

$

11,749












Net change in institutional and sub-advisory accounts,












including market performance


(54)


682


(462)


406


(1,288)












Institutional and sub-advisory accounts AUM,












end of period

$

11,033

$

11,087

$

10,405

$

10,867

$

10,461












Private client AUM

$

4,784

$

4,586

$

4,192

$

4,414

$

4,350












AUM, end of period

$

33,628

$

33,212

$

31,450

$

33,311

$

33,026












Alternative asset management platform AUM2

$

619

$

535

$

268

$

268

$

268

Total AUM, including alternative asset management












platform, end of period

$

34,247

$

33,747

$

31,718

$

33,579

$

33,294

1 

Gross sales and redemptions include rebalancing of AGF Concert Series of $25.6 million and $62.2 million for the three months ended
February 29, 2016 and August 31, 2015, respectively.

2 

Represents fee-earning committed and/or invested capital from AGF and external investors held through joint ventures. AGF's portion of this
commitment is $150.0 million, of which $90.9 million has been funded as at August 31, 2016, which includes $10.1 million return of capital
related to the monetization of its seed assets.

 

Consolidated Operating Results















Three months ended

Nine months ended




August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars, except per share data)



2016


2016


2015


2016


2015













Income













Management, advisory and administration fees


$

102.2

$

101.1

$

105.3

$

298.1

$

315.5


Deferred sales charges



2.2


2.4


2.2


7.0


7.2


Share of profit of associate and joint ventures



1.5


4.6


2.0


10.2


10.2


Fair value adjustments and other income



3.5


3.0


6.3


8.5


11.7




109.4


111.1


115.8


323.8


344.6













Expenses













Selling, general and administrative



52.4


54.0


50.1


151.7


141.4


Trailing commissions



30.9


30.1


32.7


91.0


97.5


Investment advisory fees



0.8


0.8


1.2


2.3


4.0




84.1


84.9


84.0


245.0


242.9













EBITDA from continuing operations1



25.3


26.2


31.8


78.8


101.7


Amortization, derecognition and depreciation



12.8


12.0


13.5


36.9


40.1


Interest expense



2.2


2.4


2.4


6.9


8.1

Income before taxes



10.3


11.8


15.9


35.0


53.5














Income taxes



2.4


2.5


4.0


7.8


13.4

Net income from continuing operations



7.9


9.3


11.9


27.2


40.1













Net loss from discontinued operations




(0.1)



(0.1)














Net income for the period



7.9


9.2


11.9


27.1


40.1













Net income (loss) attributable to:













Equity owners of the Company


$

8.2

$

9.5

$

11.9

$

27.8

$

40.1


Non-controlling interest         



(0.3)


(0.3)



(0.7)





7.9


9.2


11.9


27.1


40.1













Earnings per share for the period attributable to













equity holders of the Company














Basic earnings per share















Continuing operations


$

0.10

$

0.12

$

0.14

$

0.35

$

0.48




Discontinued operations









Basic earnings per share


$

0.10

$

0.12

$

0.14

$

0.35

$

0.48















Diluted earnings per share















Continuing operations


$

0.10

$

0.12

$

0.14

$

0.35

$

0.48




Discontinued operations









Diluted earnings per share


$

0.10

$

0.12

$

0.14

$

0.35

$

0.48

1 

For the definition of EBITDA, see the 'Key Performance Indicators, Additional IFRS and Non-IFRS Measures' section. The items required
to reconcile EBITDA to net income from continuing operations, a defined term under IFRS, are detailed above.

 

One-time Adjustments















Three months ended

Nine months ended



August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars, except per share data)



2016


2016


2015


2016


2015













EBITDA from continuing operations


$

25.3

$

26.2

$

31.8

$

78.8

$

101.7













Add:













Fund custody and accounting transition costs




1.5



1.5



Special distribution from a long-term investment





(5.7)



(5.7)


Restructuring costs





4.4



4.4


AGF's share of a tax levy recorded by S&WHL



2.1




2.1


Adjusted EBITDA from continuing operations


$

27.4

$

27.7

$

30.5

$

82.4

$

100.4













Net income from continuing operations













attributable to equity owners of the Company


$

8.2

$

9.6


11.9

$

27.9

$

40.1













Add (deduct):













Adjustments to EBITDA from above



2.1


1.5


(1.3)


3.6


(1.3)


Tax impact on the adjustments to EBITDA above




(0.4)


(0.4)


(0.4)


(0.4)

Adjusted net income from continuing operations













attributable to equity owners of the Company


$

10.3

$

10.7

$

10.2

$

31.1

$

38.4













Adjusted diluted EPS from continuing operations


$

0.13

$

0.13

$

0.12

$

0.39

$

0.46

 

Income
For the three and nine months ended August 31, 2016, income decreased by 5.5% and 6.0% over the previous year, with changes in the categories as follows:

Management, Advisory and Administration Fees
Management and advisory fees are directly related to our AUM levels while administration fees are directly related to the number of client accounts and transactions incurred. Management, advisory and administration fees are recognized on an accrual basis. For the three months ended August 31, 2016, a 6.8% decline in average daily retail fund AUM and a strategic reduction in management fees across 17 retail products partly offset by a 5.5% increase in institutional and sub-advisory accounts AUM contributed to a decrease in management and advisory fees revenue for the three and nine months ended August 31, 2016 compared to 2015. This was offset by $5.7 million and $13.1 million of fund administration revenue for the three and nine months ended August 31, 2016 as a result of the internalization of this function.

Deferred Sales Charges (DSC)
We receive deferred sales charges upon redemption of securities sold on the contingent DSC or low-load commission basis for which we finance the selling commissions paid to the dealer. The DSC ranges from 1.5% to 5.5%, depending on the commission option of the original subscription price of the funds purchased if the funds are redeemed within the first two years and declines to zero after six or seven years. DSC revenue fluctuates based on the level of redemptions, the age of the assets being redeemed and the proportion of redemptions composed of back-end assets. DSC revenue remained stable for the three months ended August 31, 2016 and decreased by 2.8% for the nine months ended August 31, 2016 as compared to 2015, reflecting a 21.9% decline in redemptions offset by the redemption of an increased proportion of new higher-yielding DSC assets.

Share of Profit of Associate and Joint Ventures
Share of profit of associate and joint ventures decreased 25.0% to $1.5 million for the three months ended August 31, 2016, compared to $2.0 million during the same period in 2015 and remained stable at $10.2 million for the nine months ended August 31, 2016, compared to the same period in 2015.

Share of profit of associate represents earnings related to our 32.5% ownership in S&WHL. Earnings for the three and nine months ended August 31, 2016 included a one-time charge of $2.1 million related to AGF's share of a tax levy recorded by S&WHL. Excluding this one-time charge, earnings in S&WHL's business increased 94.4% and 21.6% to $3.5 million and $11.8 million for the three and nine months ended August 31, 2016, compared to the same periods in 2015.

Share of profit of joint venture represents earnings related to our ownership in the joint venture which manages our infrastructure funds, which is accounted for under the equity method. For the three and nine months ended August 31, 2016, we recorded $0.1 million and $0.5 million (2015 – $0.2 million and $0.5 million) related to earnings from this joint venture. For additional information see Note 5 of the condensed consolidated interim financial statements.

A breakdown of the share of profit of associate and joint ventures is as follows:

















Three months ended

Nine months ended




August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars)



2016


2016

2015

2016

2015














Share of profit of S&WHL



$

1.4

$

4.4

$

1.8

$

9.7

$

9.7

Share of profit of joint ventures1




0.1


0.2


0.2


0.5


0.5




$

1.5

$

4.6

$

2.0

$

10.2

$

10.2

Excludes the Company's portion of the estimated carried interest to be distributed to AGF on crystallization.

 

Fair Value Adjustments and Other Income
Fair value adjustments and other income include fair value adjustments and distributions associated with our long-term investments and mark to market adjustments related to AGF mutual funds which are held as seed capital investments. Long-term investments include investments in Stream and EIF, which is accounted for at fair value through profit or loss. During the three and nine months ended August 31, 2016, we recorded $2.2 million and $6.2 million (2015 – $8.0 million and $11.6 million) as fair value adjustments and income distributions related to the investments in our alternative asset management platform. During the three and nine months ended August 31, 2015, Stream monetized one of its seed assets, which resulted in the Company receiving a special distribution of $15.9 million of which $10.1 million represented a return of capital and $5.7 million was recognized as distribution income.















Three months ended

Nine months ended



August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars)


2016

2016

2015

2016

2015













Fair value adjustment related to













investment in AGF mutual funds


$

0.9

$

1.0

$

(1.7)

$

0.5

$

(0.8)

Fair value adjustment and distributions













related to long-term investments1



2.2


1.2


8.0


6.2


11.6

Interest income



0.1


0.1


0.1


0.5


0.9

Other



0.3


0.7


(0.1)


1.3




$

3.5

$

3.0

$

6.3

$

8.5

$

11.7

Includes a $5.7 million special distribution from a long-term investment for the three and nine months ended August 31, 2015.

 

Expenses
For the three and nine months ended August 31, 2016, expenses increased 0.1% and 0.9% from the same periods in 2015. Changes in specific categories are described in the discussion that follows:

Selling, General and Administrative Expenses (SG&A)
SG&A increased by $2.3 million and $10.3 million, or 4.6% and 7.3% for the three and nine months ended August 31, 2016, compared to the same periods in 2015, primarily as a result of the internalization of our fund administration function and the acquisition of FFCM. Excluding one-time costs, SG&A increased $6.7 million and $13.2 million, or 13.4% and 9.3% for the three and nine months ended August 31, 2016, compared to the same periods in 2015.
A breakdown of the increase is as follows:












Three months ended


Nine months ended

(in millions of Canadian dollars)

August 31, 2016


August 31, 2016











Increase in salaries and benefits



$

4.2




$

8.1

Decrease in sales and marketing expenses




(0.4)





(1.5)

Increase in professional fees




0.7





1.9

Decrease in fund absorption expenses and other fund costs




(0.5)





(0.4)

Increase in information technology and facilities




2.6





5.8

Increase in other expenses




0.1





(0.7)

Adjusted SG&A excluding one-time costs



$

6.7




$

13.2

Increase in fund custody and accounting transition costs








1.5

Decrease in restructuring costs




(4.4)





(4.4)




$

2.3




$

10.3

 

The following explains expense changes in the three and nine months ended August 31, 2016, compared to the same periods in the prior year:

  • Salaries and benefits increased $4.2 million and $8.1 million for the three and nine months ended August 31, 2016, compared to the same periods in 2015, as a result of the internalization of the fund administration function through AGF CustomerFirst Inc. and partly due to the acquisition of FFCM.
  • Absorption and other fund costs expense decreased $0.5 million and $0.4 million for the three and nine months ended August 31, 2016, compared to the same periods in 2015, partly as a result of the internalization of the fund administration function offset against an increase in absorption costs.
  • Information technology and facilities increased $2.6 million and $5.8 million for the three and nine months ended August 31, 2016, due to the internalization of the fund administration function and the acquisition of FFCM.
  • One-time costs of $1.5 million related to the transfer of our custody and fund accounting operations were incurred during the nine months ended August 31, 2016.
  • During the three and nine months ended August 31, 2016, restructuring expense was $4.4 million lower compared to the same periods in 2015 related to a reduction in staff levels in the prior period.

Trailing Commissions
Trailing commissions paid to distributors depend on total AUM, the proportion of mutual fund AUM sold on a front-end versus back-end commission basis and the proportion of equity fund AUM versus fixed-income fund AUM. Annualized trailing commissions as a percentage of average daily retail fund AUM were 0.70% and 0.69% for the three and nine-months ended August 31, 2016, compared to 0.69% and 0.68% for the same periods in 2015, reflecting an increase in weighting towards higher-rate mature assets.

EBITDA and EBITDA Margin (Non-IFRS Measures)
EBITDA from continuing operations were $25.3 million and $78.8 million for the three and nine months ended August 31, 2016, compared to $31.8 million and $101.7 million for the same periods of 2015. Adjusted EBITDA from continuing operations was $27.4 million and $82.4 million for the three and nine months ended August 31, 2016, compared to $30.5 million and $100.4 million for the same periods of 2015.

EBITDA margin was 23.1% and 24.3% for the three and nine months ended August 31, 2016, compared to 27.5% and 29.5% in the corresponding period in 2015. Adjusted EBITDA margin was 24.6% and 25.3% for the three and nine months ended August 31, 2016, compared to 27.7% and 29.6% in the corresponding period in 2015.

Amortization and Interest Expense
The category represents amortization of deferred selling commissions, customer contracts, other intangible assets, property, equipment, and computer software and interest expense. Deferred selling commissions amortization represents the most significant category of amortization. We internally finance all selling commissions paid. These selling commissions are capitalized and amortized on a straight-line basis over a period that corresponds with their applicable DSC schedule. Unamortized deferred selling commissions related to units redeemed prior to the end of the schedule are immediately expensed. Amortization expense related to deferred selling commissions was $10.1 million and $28.7 million for the three and nine months ended August 31, 2016, compared to $11.1 million and $31.7 million for the same periods in 2015. During the three and nine months ended August 31, 2016, we paid $6.5 million and $23.9 million in selling commissions, compared to $8.3 million and $28.7 million in the same periods of 2015, reflecting lower gross sales and a trend toward front-end sales, which do not pay a DSC commission. As at August 31, 2016, the unamortized balance of deferred selling commissions financed was $94.5 million (November 30, 2015$99.3 million).

Customer contracts amortization and derecognition increased $0.2 million for the three months ended August 31, 2016 as a result of the acquisition of FFCM and decreased $0.5 million for nine months ended August 31, 2016, as a result of a lower carrying value. Customer contracts are immediately expensed upon redemption of the AUM.

Other intangibles amortization and derecognition decreased $0.1 million and $0.4 million for the three and nine months ended August 31, 2016.

Depreciation increased $0.2 million and $0.7 million for the three and nine months ended August 31, 2016, reflecting the investment related to the internalization of the fund administration function.

Interest expense decreased as a result of lower average debt levels.

Income Tax Expense
Income tax expense for the three and nine months ended August 31, 2016 was $2.4 million and $7.8 million, as compared to $4.0 million and $13.4 million in the corresponding period in 2015. The estimated effective tax rate for the nine months ended August 31, 2016 was 22.2% (2015 – 25.0%).

The Company believes that it has adequately provided for income taxes based on all of the information that is currently available. The calculation of income taxes in many cases, however, requires significant judgement in interpreting tax rules and regulations. The Company's tax filings are subject to audits, which could materially change the amount of the current and deferred income tax assets and liabilities, and could, in certain circumstances, result in the assessment of interest and penalties.

The Company has several ongoing disputes with the CRA, of which the final result of the audit and appeals process may vary and may be materially different compared to the estimates and assumptions used by management in determining the Company's consolidated income tax provision and in determining the amounts of its income tax assets and liabilities.

(a) CRA Audit – Transfer Pricing

During the period November 30, 2013 to August 31, 2016, the Company has received a number of notices of reassessment (NOR) from the CRA for its 2005 through 2010 fiscal years relating to the transfer pricing and allocation of income between one of the Company's Canadian legal entities and a foreign subsidiary. These reassessments would increase the Company's taxes payable (including interest and penalties of $32.2 million), net of estimated relief from double taxation of $21.4 million, from its original tax filings by $71.9 million. Any Competent Authority relief from double taxation should be granted at the completion of the mutual agreement procedures (MAP) under the applicable tax treaty.

The Company strongly disagrees with the CRA's position and filed various objections to the NOR for the taxation years 2005 to 2010. In connection with the filing of an objection to the NORs for the applicable periods 2005 through 2010, the Company has paid approximately $60.1 million ($62.1 million paid, net of $2.0 million of interest relief refunded by CRA) of which $8.1 million was paid (including interest and penalties) during the nine months ended August 31, 2016 in relation to the 2009 and 2010 NORs.

In consultation with its external advisors, the Company believes that its transfer pricing methodology was reasonable and the Company is contesting the CRA's position and any related transfer pricing penalty. The Company believes it is likely that the CRA will reassess its taxes for subsequent years on a similar basis and that these may result in future cash payments on receipt of the reassessments. During the nine months ended August 31, 2016, the Company has recorded a tax expense of $1.5 million (2015 – $1.1 million) in relation to this transfer pricing audit. The amount of tax provision recorded on the consolidated interim statement of financial position reflects management's best estimate on the ultimate resolution of this matter and includes any related estimated interest and penalties for the 2005 to 2016 fiscal years.

In 2013, the Company was accepted by the CRA into a Bilateral Advance Pricing Arrangement (BAPA) between Canada and the relevant tax authorities to establish the appropriate transfer pricing methodologies for the tax years 2011 through 2016. Under a BAPA, the taxpayer will receive certainty as to its transfer pricing arrangements for the years under consideration, will not be assessed transfer pricing penalties, and can avoid double taxation on transactions covered by the BAPA according to the provision of the income tax treaty between Canada and the foreign country.

(b) CRA Audit – Foreign Accrual Property Income

During the quarter ended August 31, 2016, CRA notified the Company of the completion of the audit for the 2008 to 2012 fiscal years with no adjustments.

(c) CRA Audit – Acquisition of Tax-related Benefits

In July 2015, the Company received a NOR from the CRA denying $30.5 million of tax-related benefits acquired and utilized by the Company in the 2005 fiscal year. The NOR would increase the Company's taxes payable from its original tax filings by $10.9 million (before the application of interest and penalties of $9.7 million). The Company strongly disagrees with the CRA's position and has filed an objection to the NOR. As a result of receiving the NOR, the Company paid $13.5 million (including interest and penalties) during the year ended November 30, 2015, which was recorded as income tax receivable on the consolidated interim statement of financial position. In consultation with its external advisors, the Company believes that its tax position is probable of being sustained and, as a result, has not recorded a provision in relation to this matter.

Net Income
The impact of the above income and expense items resulted in net income from continuing operations attributable to the equity owners of the Company of $8.2 million and $27.9 million for the three and nine months ended August 31, 2016, as compared to net income from continuing operations attributable to the equity owners of the company of $11.9 million and $40.1 million in the corresponding period in 2015. Net income for the three and nine months ended August 31, 2016 includes a one-time $2.1 million charge related to our share of a tax levy recorded by S&WHL and $1.5 million of one-time fund custody and accounting transition costs respectively. Net income for the three and nine months ended August 31, 2015 includes a one-time special distribution of $5.7 million from a long-term investment and one-time restructuring costs of $4.4 million. Excluding one-time adjustments, adjusted net income from continuing operations attributable to the equity owners of the Company was $10.3 million and $31.1 million for the three and nine months ended August 31, 2016, compared to $10.2 million and $38.4 million for the three and nine months ended August 31, 2015.

Earnings per Share
Diluted earnings per share from continuing operations was $0.10 and $0.35 per share for the three and nine months ended August 31, 2016, as compared to earnings of $0.14 and $0.48 per share in the corresponding period of 2015. Adjusted diluted earnings per share from continuing operations was $0.13 and $0.39 per share for the three and nine months ended August 31, 2016, as compared to earnings of $0.12 and $0.46 per share in the corresponding period of 2015.

Liquidity and Capital Resources
As at August 31, 2016, the Company had total cash and cash equivalents of $58.6 million. Free cash flow, as defined on page 17, generated from continuing operating activities was $12.9 million and $40.3 million for the three and nine months ended August 31, 2016, compared to $17.0 million and $49.2 million in the prior period. During the nine months ended August 31, 2016, we generated $9.9 million (2015 – used $211.1 million) in cash as follows:










(in millions of Canadian dollars)









Nine months ended

August 31, 2016

August 31, 2015










Net cash provided by operating activities less amounts paid to CRA in










relation to ongoing tax matters



$

35.8



$

47.2

Paid to CRA in relation to ongoing tax matters




(8.1)




(18.4)

Repurchase of shares under NCIB










and treasury stock for EBT                                             




(5.5)




(42.0)

Dividends paid




(18.8)




(35.7)

Return of capital (investment) in the alternative asset management platform




52.4




(115.3)

Repayment of long-term debt




(40.0)




(40.0)

Interest paid




(7.0)




(7.7)

Other




1.1




0.8




$

9.9



$

(211.1)

 

On March 2, 2016, following the first close of EIF, AGF received net cash of $73.6 million, net of a capital call of $9.6 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund.

On August 19, 2016, following a subsequent close of EIF, AGF received $14.1 million as a return of capital to bring the Company's invested capital in line with its proportionate share of total commitments.

Total long-term debt outstanding at August 31, 2016 was $228.0 million (November 30, 2015$268.8 million). During the quarter, the Company, through its subsidiary AGF Investments Inc., amended and restated its loan agreement to extend the term to 2021. The amended unsecured revolving credit facility has a maximum aggregate principal amount of $320.0 million and includes a $10.0 million swingline facility commitment. As at August 31, 2016, $84.9 million was available to be drawn. The loan facility will be available to meet future operational and investment needs. We anticipate that cash balances and cash flow from operations, together with the available loan facility, will be sufficient in the foreseeable future to implement our business plan, fund our alternative asset management platform commitments, finance selling commissions, satisfy regulatory and tax requirements, service debt repayment obligations, pay quarterly dividends, and fund any future share buybacks.

Capital Management Activities from Continuing Operations
We actively manage our capital to maintain a strong and efficient capital base to maximize risk-adjusted returns to shareholders, to invest in future growth opportunities, including acquisitions, and to ensure that the regulatory capital requirements are met for each of our subsidiary companies.

AGF capital consists of shareholders' equity and long-term debt. On an annual basis, AGF prepares a three-year plan detailing projected operating budgets and capital requirements. AGF is required to submit this plan to AGF's Finance Committee for approval prior to seeking Board approval. AGF's Finance Committee consists of the Chairman and CEO, the Vice-Chairman, Senior Vice-President and CFO, the Executive Vice-President and Chief Operating Officer, and the President and CIO. Once approved by the Finance Committee, the three-year plans are reviewed and approved by AGF's Board of Directors. These plans become the basis for the payment of dividends to shareholders, the repurchase of Class B Non-Voting shares and, combined with the reasonable use of leverage, the source of funds for expansion through organic growth and strategic investments.

Normal Course Issuer Bid
On February 2, 2016, AGF announced that the Toronto Stock Exchange (TSX) had approved AGF's notice of intention to renew its normal course issuer bid (NCIB) in respect of its Class B Non-Voting shares. AGF believes that the purchase for cancellation of Class B Non-Voting shares represents a desirable use of capital when, if in the opinion of management, the value of the Class B Non-Voting shares is attractive relative to the trading price of said shares. Purchase for cancellation by AGF of outstanding Class B Non-Voting shares may also be used to offset the dilutive effect of treasury stock released for the employee benefit trust and of shares issued through the Company's stock option plans and dividend reinvestment plan. AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. Under its normal course issuer bid, the Class B Non-Voting shares may be repurchased from time to time at prevailing market prices or such other price as may be permitted by the TSX for amounts as follows:

  • Between February 4, 2016 and February 3, 2017, up to 4,664,042 Class B Non-Voting shares, or 10% of the public float for such shares, through the facilities of the TSX (or as otherwise permitted by the TSX); and
  • Between February 4, 2015 and February 3, 2016, up to 6,707,999 Class B Non-Voting shares, or 10% of the public float for such shares, through the facilities of the TSX (or as otherwise permitted by the TSX).

During the three months ended August 31, 2016, AGF repurchased 29,964 shares under its normal course issuer bid for a total consideration of $0.2 million at an average price of $4.94 per share. During the nine months ended August 31, 2016, under its normal course issuer bid, AGF repurchased 1,029,964 Class B Non-Voting shares for a total consideration of $5.3 million at an average price of $5.11 per share.

During the three and nine months ended August 31, 2016, AGF purchased nil shares for the employee benefit trust. During the nine months ended August 31, 2016, under its normal course issuer bid, AGF purchased 60,000 Class B Non-Voting shares for the employee benefit trust for a total consideration of $0.3 million at an average price of $4.46 per share.

Dividends
The holders of Class B Non-Voting and Class A Voting common shares are entitled to receive cash dividends. Dividends are paid in equal amounts per share on all the Class B Non-Voting shares and all the Class A Voting common shares at the time outstanding without preference or priority of one share over another. No dividends may be declared in the event that there is a default of a condition of our credit facility or where such payment of dividends would create a default.

Our Board of Directors may determine that Class B Non-Voting shareholders shall have the right to elect to receive part or all of such dividend in the form of a stock dividend. They also determine whether a dividend in Class B Non-Voting shares is substantially equal to a cash dividend. This determination is based on the weighted average price at which the Class B Non-Voting shares traded on the TSX during the 10 trading days immediately preceding the record date applicable to such dividend.

The following table sets forth the dividends paid by AGF on Class B Non-Voting shares and Class A Voting common shares for the years indicated:

















Years ended November 30



20161



2015



2014



2013



2012

















Per share


$

0.32


$

0.51


$

1.08


$

1.08


$

1.08

1 

Represents the total dividends paid in December 2015, April 2016, July 2016 and to be paid in October 2016.

 

We review our dividend distribution policy on a quarterly basis, taking into account our financial position, profitability, cash flow and other factors considered relevant by our Board of Directors. The quarterly dividend paid on July 18, 2016 was $0.08 per share.

On September 27, 2016, the Board of Directors of AGF declared a quarterly dividend on both the Class A Voting common shares and Class B Non-Voting shares of the Company of $0.08 per share in respect of the three months ended August 31, 2016.

Outstanding Share Data
Set out below is our outstanding share data as at August 31, 2016 and 2015. For additional detail, see Notes 9 and 13 of the condensed consolidated interim financial statements.













August 31,



August 31,





2016



2015









Shares









Class A Voting common shares




57,600



57,600


Class B Non-Voting shares




79,234,931



80,250,635









Stock Options









Outstanding options




7,553,310



5,720,011


Exercisable options




3,155,739



2,484,363

 

Key Performance Indicators, Additional IFRS and Non-IFRS Measures
We measure the success of our business strategies using a number of key performance indicators (KPI), which are outlined below. With the exception of income, the following KPIs are non-IFRS measures, which are not defined under IFRS. They should not be considered as an alternative to net income attributable to equity owners of the Company or any other measure of performance under IFRS. 

Income
Income is a measurement defined by IFRS and is recorded net of fee rebates. Income is indicative of our potential to deliver cash flow.

We derive our income principally from a combination of:

  • management advisory fees based on AUM and from fund administration fees,
  • DSC earned from investors when mutual fund securities sold on a DSC basis are redeemed,
  • 32.5% equity interest in S&WHL, and
  • general partnership interest and long-term investments in the alternative asset management platform.

EBITDA
We define EBITDA as earnings before interest, taxes, depreciation and amortization. EBITDA is a standard measure used in the mutual fund industry by management, investors and investment analysts to understand and compare results. We believe this is an important measure as it allows us to assess our investment management businesses without the impact of non-operational items.

Please see the Consolidated Operating Results section on page 8 of this MD&A for a schedule showing how EBITDA reconciles to our IFRS financial statements.

Free Cash Flow
Free cash flow represents cash available for distribution to our shareholders, share buybacks, investment in our alternative asset management platform and general corporate purposes. We define free cash flow as cash flow from operations before net changes in non-cash balances related to operations less interest paid and adjusted for certain tax items outlined below. Free cash flow is a relevant measure in the investment management business since a substantial amount of cash is spent on upfront commission payments.















Three months ended

Nine months ended



August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars)



2016


2016


2015


2016


2015













Net cash provided by (used in)













continuing operating activities


$

18.3

$

25.7

$

26.7

$

27.7

$

28.8

Adjusted for:













Net changes in non-cash working capital














balances related to operations



(3.3)


(10.5)


(9.6)


12.0


6.6


Taxes paid related to transfer pricing audit














and other tax contingencies




5.3


3.9


8.1


18.4


Interest paid



(2.4)


(2.2)


(2.4)


(7.0)


(7.7)


Prior years' cash taxes paid and anticipated














cash taxes to be refunded related to the














current year continuing operations



0.3


(1.9)


(1.6)


(0.5)


3.1

Free cash flow


$

12.9

$

16.4

$

17.0

$

40.3

$

49.2

 

EBITDA Margin
EBITDA margin provides useful information to management and investors as an indicator of our overall operating performance. We believe EBITDA margin is a valuable measure because it assesses the extent we are able to earn profit from each dollar of income. We define EBITDA margin as the ratio of EBITDA from continuing operations to income.















Three months ended

Nine months ended



August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars)


2016

2016

2015

2016

2015













EBITDA from continuing operations


$

25.3

$

26.2

$

31.8

$

78.8

$

101.7

Divided by income



109.4


111.1


115.8


323.8


344.6

EBITDA margin



23.1%


23.6%


27.5%


24.3%


29.5%

 

Long-term Debt to EBITDA Ratio
Long-term debt to EBITDA ratio provides useful information to management and investors as an indicator of our ability to service our long-term debt. We define long-term debt to EBITDA ratio as long-term debt at the end of the period divided by annualized EBITDA from continuing operations for the period.















Three months ended

Nine months ended



August 31,


May 31,

August 31,

August 31,

August 31,

(in millions of Canadian dollars)


2016

2016

2015

2016

2015













Long-term debt


$

228.0

$

228.9

$

268.7

$

228.0

$

268.7

Divided by EBITDA (annualized)



104.3


110.8


136.1


104.3


136.1

Long-term debt to EBITDA ratio



218.6%


206.6%


197.4%


218.6%


197.4%

 

Assets Under Management
The amount of AUM and the related fee rates are important to our business as these are the drivers of our revenue from our mutual fund, institutional and sub-advisory accounts and private client relationships and alternative asset management platform. AUM will fluctuate in value as a result of investment performance, sales and redemptions and crystallization of long-term investments. Mutual fund sales and AUM determine a significant portion of our expenses because we pay upfront commissions on gross sales and trailing commissions to financial advisors as well as investment advisory fees based on the value of AUM.

Investment Performance
Investment performance, which represents market appreciation (depreciation) of fund portfolios and is shown net of management fees received, is a key driver of the level of AUM and is central to the value proposition that we offer advisors and unitholders. Growth in AUM resulting from investment performance increases the wealth of our unitholders and, in turn, we benefit from higher revenues. Alternatively, poor investment performance will reduce our AUM levels and result in lower management fee revenues. Strong relative investment performance may also contribute to growth in gross sales or reduced levels of redemptions. Conversely, poor relative investment performance may result in lower gross sales and higher levels of redemptions. Refer to the 'Risk Factors and Management of Risk' section of our 2015 Annual MD&A.

Net Sales (Redemptions)
Gross sales and redemptions are monitored separately and the sum of these two amounts comprises net sales (redemptions). Net sales (redemptions), together with investment performance and fund expenses, determine the level of average daily retail fund AUM, which is the basis on which management fees are charged. The average daily retail fund AUM is equal to the aggregate average daily net asset value of the AGF retail funds. We monitor AUM in our institutional, sub-advisory and private client and alternative businesses separately. We do not compute an average daily retail fund AUM figure for them.

Market Capitalization
The Company's Class B Non-Voting share price continued to experience downward pressure during 2016. As a result, AGF's market capitalization of $395.2 million remained below its recorded net assets of $903.9 million. In 2015, we utilized independent specialists to determine the fair value of AGF's cash-generating units (CGUs). Based on the result of the assessment, the recoverable amount of each CGU exceeded its carrying value as at November 30, 2015. There have been no significant changes to the recoverable amount of each CGU as at August 31, 2016. Estimating the fair value of CGUs is a subjective process that involves the use of estimates and judgements, particularly related to cash flows, the appropriate discount rates, terminal growth rates and an applicable control premium.

Managing Risk
AGF is subject to a number of risk factors that may impact our operating and financial performance. These risks and the management of these risks are detailed in our 2015 Annual MD&A in the section entitled 'Risk Factors and Management of Risk.' The Company has not identified any material changes to the risk factors affecting its business or in the management of these risks.

Internal Control Over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer have designed or caused the design of the Internal Controls Over Financial Reporting (ICFR) and Disclosure Controls and Procedures. There have been no changes in AGF's internal controls during the nine months ended August 31, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Additional Information
Additional information relating to the Company can be found in the Company's Condensed Consolidated Interim Financial Statements and accompanying notes for the three and nine months ended August 31, 2016, the Company's 2015 Annual Information Form (AIF) and Annual Report, and other documents filed with applicable securities regulators in Canada, and may be accessed at www.sedar.com.

AGF Management Limited
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

For the three and nine months ended August 31, 2016 and 2015

AGF Management Limited
Consolidated Interim Statement of Financial Position










(unaudited)




August 31,



November 30,

(in thousands of Canadian dollars)

Note



2016



2015









Assets









Current Assets










Cash and cash equivalents



$

58,563


$

48,669



Investments

4



23,201



23,427



Accounts receivable, prepaid expenses and other assets




45,353



40,242



Income tax receivable

14, 19





149





127,117



112,487










Investment in associate and joint ventures

5



98,925



106,229


Long-term investments

5



84,281



140,534


Management contracts

7



689,759



689,759


Customer contracts, net of accumulated amortization and derecognition

7



7,395



9,660


Goodwill

7



249,952



249,952


Other intangibles, net of accumulated amortization and derecognition

7



5,097



8,130


Deferred selling commissions, net of accumulated amortization and derecognition

7



94,484



99,291


Property, equipment and computer software, net of accumulated depreciation




11,152



9,990


Deferred income tax assets




7,088



3,102


Income tax receivable

14, 19



13,262



6,683


Other assets

5





1,108

Total assets



$

1,388,512


$

1,436,925









Liabilities









Current Liabilities










Accounts payable and accrued liabilities

13


$

61,985


$

69,325



Income tax liability

14, 19



626





Provision for Elements Advantage




979



1,412



Derivative financial instrument






1,763





63,590



72,500










Long-term debt

8



228,042



268,782


Contingent consideration payable

6



2,019



1,990


Deferred income tax liabilities




179,960



175,548


Provision for Elements Advantage




1,108



1,159


Other long-term liabilities

13



9,924



6,093

Total liabilities




484,643



526,072









Equity









Equity attributable to owners of the Company










Capital stock

9



478,908



481,265



Contributed surplus

13



39,590



40,336



Retained earnings




370,853



361,383



Accumulated other comprehensive income

10



12,077



24,734





901,428



907,718









Non-controlling interest

6



2,441



3,135









Total equity




903,869



910,853

Total liabilities and equity



$

1,388,512


$

1,436,925









(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements)

 

 


AGF Management Limited
Consolidated Interim Statement of Income










(unaudited)



Three months ended



August 31,



August 31,

(in thousands of Canadian dollars, except per share data)

Note


2016

2015









Income









Management, advisory and administration fees



$

102,164


$

105,338


Deferred sales charges




2,234



2,185


Share of profit of associate and joint ventures

5



1,527



1,981


Fair value adjustments and other income

5, 11



3,484



6,341

Total income




109,409



115,845









Expenses









Selling, general and administrative

12



52,395



50,086


Trailing commissions




30,890



32,725


Investment advisory fees




814



1,243


Amortization and derecognition of deferred selling commissions




10,085



11,068


Amortization and derecognition of customer contracts




721



549


Amortization and derecognition of other intangibles




997



1,056


Depreciation of property, equipment and computer software




960



790


Interest expense




2,227



2,488





99,089



100,005









Income before income taxes




10,320



15,840









Income tax expense (benefit)









Current

14



1,583



4,439


Deferred

14



858



(479)





2,441



3,960









Income from continuing operations, net of tax




7,879



11,880









Loss from discontinued operations, net of tax




(34)











Net income for the period



$

7,845


$

11,880









Net income (loss) attributable to:









Equity owners of the Company



$

8,109


$

11,880


Non-controlling interest




(264)






$

7,845


$

11,880









Earnings per share for the period attributable to








  equity owners of the Company









Basic earnings per share










Continuing operations

15


$

0.10


$

0.14



Discontinued operations                                            

15








$

0.10


$

0.14










Diluted earnings per share










Continuing operations

15


$

0.10


$

0.14



Discontinued operations

15








$

0.10


$

0.14




(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.)

 

 

AGF Management Limited
Consolidated Interim Statement of Income

















(unaudited)



Nine months ended





August 31,



August 31,

(in thousands of Canadian dollars, except per share data)

Note



2016


2015









Income









Management, advisory and administration fees



$

298,145


$

315,535


Deferred sales charges




7,022



7,205


Share of profit of associate and joint ventures

5



10,224



10,207


Fair value adjustments and other income

5, 11



8,450



11,674

Total income




323,841



344,621









Expenses









Selling, general and administrative

12



151,673



141,435


Trailing commissions




91,000



97,532


Investment advisory fees




2,318



3,993


Amortization and derecognition of deferred selling commissions




28,711



31,749


Amortization and derecognition of customer contracts




2,265



2,743


Amortization and derecognition of other intangibles




3,033



3,425


Depreciation of property, equipment and computer software




2,914



2,223


Interest expense




6,859



8,048





288,773



291,148









Income before income taxes




35,068



53,473









Income tax expense (benefit)









Current

14



8,138



13,208


Deferred

14



(349)



160





7,789



13,368









Income from continuing operations, net of tax




27,279



40,105









Loss from discontinued operations, net of tax




(140)











Net income for the period



$

27,139


$

40,105









Net income (loss) attributable to:









Equity owners of the Company



$

27,833


$

40,105


Non-controlling interest




(694)






$

27,139


$

40,105









Earnings per share for the period attributable to








  equity owners of the Company









Basic earnings per share










Continuing operations

15


$

0.35


$

0.48



Discontinued operations                                             

15








$

0.35


$

0.48










Diluted earnings per share










Continuing operations

15


$

0.35


$

0.48



Discontinued operations

15








$

0.35


$

0.48









(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.)

 

 


AGF Management Limited
Consolidated Interim Statement of Comprehensive Income

























(unaudited)

Three months ended August 31,


Nine months ended August 31,

(in thousands of Canadian dollars)


2016



2015



2016



2015













Net income for the period

$

7,845


$

11,880


$

27,139


$

40,105













Other comprehensive income (loss), net of tax

























Cumulative translation adjustment














Foreign currency translation adjustments related to net investments in foreign operations


(9,210)



6,542



(15,056)



12,645



(9,210)



6,542



(15,056)



12,645


Net unrealized gains on investments














Unrealized gains


838



245



1,286



452



838



245



1,286



452


Net unrealized gains (losses) on cash flow hedge














Unrealized gains (losses)


179



(216)



223



(763)



Reclassification of realized losses to earnings


230



309



890



877



409



93



1,113



114













Total other comprehensive income (loss), net of tax

$

(7,963)


$

6,880


$

(12,657)


$

13,211













Comprehensive income (loss)

$

(118)


$

18,760


$

14,482


$

53,316













Comprehensive income (loss) attributable to:














Equity holders of the Company

$

146


$

18,760


$

15,176


$

53,316



Non-controlling interest


(264)





(694)




$

(118)


$

18,760


$

14,482


$

53,316













All items presented in other comprehensive income (loss) will be reclassified to the consolidated statement of income (loss) in subsequent periods.


(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.)

 

 

AGF Management Limited
Consolidated Interim Statement of Changes in Equity































(unaudited)















(in thousands of Canadian dollars)


Capital
stock


Contributed
surplus


Retained
earnings


Accumulated
other
comprehensive
income


Attributable
to equity
owners of
the Company


Non-
controlling
interest


Total
equity
















Balance, December 1, 2014

$

517,467

$

39,584

$

361,628

$

11,096

$

929,775

$

$

929,775

Net income for the period




40,105



40,105



40,105

Other comprehensive income
















(net of tax)





13,211


13,211



13,211

Comprehensive income
















for the period




40,105


13,211


53,316



53,316

Issued through dividend
















reinvestment plan


474





474



474

Stock options


101


1,025




1,126



1,126

AGF Class B Non-Voting
















shares repurchased for
















cancellation


(30,947)



(5,537)



(36,484)



(36,484)

Dividends on AGF Class A
















Voting common shares and
















AGF Class B Non-Voting shares,
















including tax of $0.4 million




(36,552)



(36,552)



(36,552)

Equity-settled Restricted Share
















Units and Partner Points,
















net of tax



(427)




(427)



(427)

Treasury stock


(1,566)





(1,566)



(1,566)

Balance, August 31, 2015

$

485,529

$

40,182

$

359,644

$

24,307

$

909,662

$

$

909,662
















Balance, December 1, 2015

$

481,265

$

40,336

$

361,383

$

24,734

$

907,718

$

3,135

$

910,853

Net income (loss) for the period




27,833



27,833


(694)


27,139

Other comprehensive loss
















(net of tax)





(12,657)


(12,657)



(12,657)

Comprehensive income (loss)
















for the period




27,833


(12,657)


15,176


(694)


14,482

Issued through dividend
















reinvestment plan


277





277



277

Stock options



1,145




1,145



1,145

AGF Class B Non-Voting shares
















repurchased for cancellation


(6,251)



987



(5,264)



(5,264)

Dividends on AGF Class A
















Voting common shares and
















AGF Class B Non-Voting shares,
















including tax of $0.2 million




(19,350)



(19,350)



(19,350)

Equity-settled Restricted Share
















Units and Partner Points,
















net of tax



(1,891)




(1,891)



(1,891)

Treasury stock


3,617





3,617



3,617

Balance, August 31, 2016

$

478,908

$

39,590

$

370,853

$

12,077

$

901,428

$

2,441

$

903,869
















(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.)

 

 


AGF Management Limited
Consolidated Interim Statement of Cash Flow















(unaudited)



Nine months ended





August 31,


August 31,

(in thousands of Canadian dollars)

Note



2016


2015








Operating Activities








Net income for the period



$

27,139

$

40,105









Adjustments for









Net loss from discontinued operations




140




Amortization, derecognition and depreciation




36,923


40,140



Interest expense




6,859


8,048



Income tax expense

14



7,789


13,368



Income taxes paid




(14,223)


(32,402)



Stock-based compensation

13



3,748


5,578



Share of profit of associate and joint ventures

5



(10,224)


(10,207)



Distributions from associate

5



3,053


1,680



Deferred selling commissions paid




(23,904)


(28,650)



Fair value adjustment on long-term investments

5



3,826


(3,420)



Other




(1,452)


1,169





39,674


35,409









Net change in non-cash working capital balances related to operations









Accounts receivable




(4,982)


3,505



Other assets




3,279


(3,637)



Accounts payable and accrued liabilities




(12,848)


(7,604)



Other liabilities




2,573


1,173





(11,978)


(6,563)









Net cash provided by operating activities




27,696


28,846








Financing Activities








Repurchase of Class B Non-Voting shares for cancellation

9



(5,264)


(36,484)


Issue of Class B Non-Voting shares

9




91


Purchase of treasury stock

9



(267)


(5,523)


Dividends paid

16



(18,829)


(35,653)


Repayment of long-term debt

8



(40,000)


(40,000)


Issuance of short-term bridge facility

8




89,100


Repayment of short-term bridge facility

8




(89,100)


Interest paid




(6,954)


(7,664)


Net cash used in financing activities




(71,314)


(125,233)








Investing Activities








Purchase of long-term investments

5



(40,702)


(120,847)


Return of capital from long-term investments

5



93,129


10,120


Purchase of property, equipment and computer software, net of disposals




(5,504)


(2,630)


Purchase of short-term investments

4



(7,046)


(5,178)


Proceeds from sale of short-term investments

4



8,955


3,844


Proceeds from acquisitions and disposals




4,680



Net cash provided by (used in) investing activities




53,512


(114,691)








Increase (decrease) in cash and cash equivalents




9,894


(211,078)








Balance of cash and cash equivalents, beginning of period




48,669


261,498








Balance of cash and cash equivalents, end of period



$

58,563

$

50,420








(The accompanying notes are an integral part of these Condensed Consolidated Interim Financial Statements.)

 

Notes to Condensed Consolidated Interim Financial Statements

For the three and nine months ended August 31, 2016 and August 31, 2015 (unaudited)

Note 1: General Information

AGF Management Limited (AGF or the Company) is a limited liability company incorporated and domiciled in Canada under the Business Corporations Act (Ontario). The address of its registered office and principal place of business is Toronto-Dominion Bank Tower, 66 Wellington Street West, Toronto, Ontario.

The Company is an integrated, global wealth management corporation whose principal subsidiaries provide investment management for mutual funds, institutions and corporations, as well as high-net-worth clients. The Company conducts the management and distribution of mutual funds in Canada under the brand names AGF, Elements and Harmony (collectively, AGF Investments). The Company's wholly owned subsidiary AGF CustomerFirst Inc. (AGFC) provides fund administration services to the AGF mutual funds. The Company also holds a controlling interest in FFCM, LLC and investments in an associate, Smith & Williamson Holdings Limited (S&WHL), and in joint ventures InstarAGF Inc. (InstarAGF), Stream Asset Financial Management LP (SAFMLP) and Stream Asset Financial LP (Stream).

These condensed consolidated interim financial statements were authorized for issue by the Board of Directors on September 27, 2016.

Note 2: Basis of Preparation

These condensed consolidated interim financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, including International Accounting Standard 34 (IAS 34), Interim Financial Reporting. The accounting policies in these condensed consolidated interim financial statements are consistent with those disclosed in the Company's annual consolidated financial statements for the year ended November 30, 2015. The condensed consolidated interim financial statements should be read in conjunction with the Company's annual consolidated financial statements for the year ended November 30, 2015, which have been prepared in accordance with IFRS as issued by the IASB.

Certain comparative figures have been reclassified to conform to the consolidated interim financial statement presentation in the current year.

Note 3: Significant Accounting Policies

(a)    Adoption of New and Revised Accounting Standards

The accounting policies adopted in the preparation of these condensed consolidated interim financial statements are consistent with those followed in the preparation of the Company's annual consolidated financial statements for the year ended November 30, 2015. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

(b)    Accounting Standards Issued but Not Yet Applied

In January 2016, the IASB issued an amendment to IAS 12 to clarify the requirements for recognizing deferred income tax assets on unrealized losses, deferred income taxes where an asset is measured at fair value below the asset's tax base, and certain other aspects of accounting for deferred income tax assets. The amendments are effective on or after January 1, 2017 and earlier application is permitted. The Company is analyzing the amendments to determine their impact on its consolidated statement of financial position and consolidated statement of income.

In January 2016, the IASB issued an amendment to IAS 7 introducing an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The amendment is part of the IASB's Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. The amendment is effective on or after January 1, 2017 and earlier application is permitted. The Company is analyzing the amendments to determine their impact on its consolidated statement of cash flow.

Note 4: Investments

The following table presents a breakdown of investments:












August 31,




November 30,

(in thousands of Canadian dollars)



2016




2015









Fair value through profit or loss









AGF mutual funds and other


$

15,491



$

17,201


Equity securities



597




531




16,088




17,732









Available for sale









Equity securities and term deposits



6,803




5,385

Loans and receivables









Canadian government debt – Federal



310




310



$

23,201



$

23,427

 

During the three and nine months ended August 31, 2016 and 2015, no impairment charges were recognized.

Note 5: Investment in Associate, Joint Ventures and Long-term Investments

(a)   Investment in Associate

The Company holds a 32.5% investment in S&WHL accounted for using the equity method. At August 31, 2016, the carrying value was $97.5 million (November 30, 2015$105.3 million). During the three and nine months ended August 31, 2016, the Company recognized earnings of $1.4 million and $9.7 million (2015 – $1.8 million and $9.7 million) from S&WHL and received nil and $3.1 million (2015 – nil and $1.7 million) in dividends from S&WHL. During the three months ended August 31, 2016, the Company recognized a one-time charge of $2.1 million related to its share of a tax levy recorded by S&WHL.

(b)   Investment in Joint Ventures

The Company accounts for Stream Asset Financial GP LP (SAF GP), SAFMLP and InstarAGF, a joint venture with Instar Group Inc. (Instar), using the equity method of accounting. The continuity for the nine months ended August 31, 2016 and 2015 is as follows:















Nine months ended

August 31, 2016


August 31, 2015

(in thousands of Canadian dollars)     


SAFMLP

InstarAGF


Total



SAFMLP

InstarAGF


Total















Balance, beginning of period

$

933

$

$

933


$

312

$

$

312


Share of profit


538



538



470



470

Balance, end of period

$

1,471

$

$

1,471


$

782

$

$

782

 

The Company's share of profit excludes its portion of the estimated carried interest to be distributed to AGF on crystallization. Carried interest will be recognized when the amount of revenue can be reliably measured and it is probable that future economic benefits will flow to the Company, which is generally subsequent to the return of capital and contractual rate of return provided to investors.

The Company holds a 37.0% interest in SAFMLP. For the three and nine months ended August 31, 2016, the Company recognized earnings of $0.2 million and $0.5 million (2015 – $0.2 million and $0.5 million) from SAFMLP.

The Company has recorded losses with respect to its equity investment in InstarAGF only to the extent of its initial investment, which has a carrying value of nil, because it is not contractually obligated to fund the losses. As at August 31, 2016, the Company accumulated unrecognized losses of $1.8 million (November 30, 2015$1.3 million) related to its interest in InstarAGF. In addition, AGF has agreed to advance up to $5.0 million to InstarAGF on an as-needed basis as a working capital loan facility. The loan facility is non-interest bearing and is repayable on a priority basis. As at August 31, 2016, the Company had recorded a receivable of $3.8 million (November 30, 2015$3.3 million), included in accounts receivable, prepaid expenses and other assets on the consolidated interim statement of financial position.

As at August 31, 2016, the Company had recorded a $0.5 million promissory note receivable from Instar (November 30, 2015$1.0 million). The note bears interest at prime and has been included in accounts receivable, prepaid expenses and other assets on the consolidated interim statement of financial position.

(c)    Investment in Long-term Investments

The continuity for the investment in Stream and InstarAGF Essential Infrastructure Fund (EIF), accounted for at fair value through profit or loss (FVTPL), for the nine months ended August 31, 2016 and August 31, 2015 is as follows:







Nine months ended


August 31,



August 31,

(in thousands of Canadian dollars)


2016



2015







Balance, beginning of period

$

140,534


$

19,671


Purchase of long-term investments


40,702



120,847


Return of capital


(93,129)



(10,120)


Reclassification of investment




(63)


Fair value adjustment1


(3,826)



3,420

Balance, end of period

$

84,281


$

133,755

Fair value adjustment is based on the net assets of the fund less the Company's portion of the carried interest that would be payable by the fund upon crystallization.

 

The Company has committed a total of $150.0 million to funds and investments associated with the alternative asset management platform. The Company may temporarily provide capital to warehouse investments prior to formation of a fund. Upon closing of a fund with external investors, the Company receives a return of its capital in excess of its proportionate participation in the fund. The Company has designated its long-term investments in the funds at FVTPL.

As at August 31, 2016, of its $150.0 million allocation, the Company had invested $90.9 million (November 30, 2015$143.5 million), which includes $10.1 million return of capital related to the monetization of its seed assets. As at August 31, 2016, the Company has $59.1 million (November 30, 2015$6.5 million) remaining committed capital to be invested in Stream and EIF. As at August 31, 2016, the carrying value of the Company's long-term investments in the alternative asset management platform was $84.3 million (November 30, 2015$140.5 million).

During the nine months ended August 31, 2016, the Company invested $40.7 million (2015 – $120.8 million) into Stream and EIF. In connection with the first and subsequent close of EIF, during the nine months ended August 31, 2016, the Company received return of capital of $93.1 million, which aligned AGF's invested capital to its proportionate share of total commitments to the fund. InstarAGF expects to achieve the final closing of EIF by the end of 2016. During the nine months ended August 31, 2015, the Company received $10.1 million return of capital related to the monetization of its seed assets.

During the three and nine months ended August 31, 2016, the Company recognized $0.6 million in income and $3.8 million charges (2015 – $1.6 million and $3.4 million in income) related to fair value adjustments on the Company's participation in Stream and EIF.

During the three and nine months ended August 31, 2016, the Company recognized $1.6 million and $10.0 million (2015 – $6.4 million and $8.2 million) of income distributions related to its alternative asset management platform. Distributions received during the three and nine months ended August 31, 2015, include a $5.7 million special distribution.

Fair value adjustments and income distributions related to Stream and EIF are included in fair value adjustments and other income in the consolidated interim statement of income.

Note 6: Acquisitions

(a)   Acquisition of FFCM, LLC

On November 16, 2015, the Company acquired 51.0% of FFCM for a cash purchase price of $6.7 million. FFCM is a Boston-based exchange-traded funds (ETF) advisor and asset management firm whose expertise is delivered through a family of alternative and smart-beta ETFs and a number of ETF managed solutions.

In addition, the agreement includes contingent consideration if the annualized advisory revenue of FFCM exceeds certain thresholds in 2018, up to a maximum of $6.7 million. Accordingly, a contingent consideration payable of $2.0 million was recorded upon the acquisition of FFCM. As at August 31, 2016, the fair value of the contingent consideration payable is $2.0 million and is included on the statement of financial position, representing management's best estimate of the fair value thereof. The key assumption used in the analysis was the growth rate in annualized advisory revenue. A 1% increase or decrease in the growth rate would result in an increase or decrease to the undiscounted contingent consideration payable of $0.1 million and $0.3 million, respectively.

The non-controlling interest was measured based on its proportionate share of FFCM's net identifiable assets.

The preliminary fair value of the net identifiable assets acquired and consideration paid are summarized as follows:






(in thousands of Canadian dollars)








Net identifiable assets acquired





Cash


$

253


Investments



4


Accounts receivable, prepaid expenses and other assets



130


Customer contracts



6,313


Goodwill



5,403


Accounts payable and accrued liabilities



(300)


Non-controlling interest



(3,135)



$

8,668





Consideration paid





Cash


$

6,678


Contingent consideration payable



1,990



$

8,668

 

(b)   AGF CustomerFirst Inc. (AGFC)

On February 16, 2016, AGF completed the transition to internalize the Company's fund administration function within AGF. The Company did not acquire any significant net assets as a result of the acquisition. The transition included the transfer of 171 employees from Citigroup Fund Services Canada Inc. (CFSC) to AGFC. AGF invested approximately $6.0 million of capital for leaseholds, facilities and technology. As part of this transition agreement, the Company also entered into a four-year service agreement with L&T Infotech Financial Services Technologies Inc. (L&T). The agreement with L&T includes a minimum annual payment commitment of $7.8 million per year for services provided. This commitment expires in 2020. Subsequently, during the three months ended August 31, 2016, the service agreement and commitment was extended to 2021.

Note 7: Intangible Assets

Management regularly monitors its intangible assets for indications of potential impairment and determined no indicators of potential impairment were present at August 31, 2016. For additional information refer to the Company's annual consolidated financial statements for the year ended November 30, 2015. The Company's annual impairment test on its goodwill and indefinite life assets will be completed during the three months ended November 30, 2016.

Note 8: Long-term Debt

(a)   As at August 31, 2016, AGF had drawn $230.0 million (November 30, 2015$270.0 million) against the unsecured revolving credit facility (the Facility) in the form of a one-month banker's acceptance (BA) at an effective average interest rate of 2.89% per annum. During the nine months ended August 31, 2016, the Company repaid $40.0 million (2015 – $40.0 million) of its revolving credit facility. In addition, during the three months ended August 31, 2016, the Company, through its subsidiary AGF Investments Inc., amended and restated its loan agreement to extend the term to 2021.

(b)   On January 26, 2015, the Company arranged for a seven-day $100.0 million bridge facility through a Canadian chartered bank to fund an alternative asset investment. On January 26, 2015, AGF drew $89.1 million against the bridge facility, which was secured by the Company's term deposits held by the bank. The bridge facility was fully repaid on February 2, 2015. Refer to Note 5(c) for additional information on the investment in long-term investments.

Note 9: Capital Stock

(a)   Authorized Capital

The authorized capital of AGF consists of an unlimited number of AGF Class B Non-Voting shares and an unlimited number of AGF Class A Voting common shares. The Class B Non-Voting shares are listed for trading on the Toronto Stock Exchange (TSX).

(b)   Changes During the Period

The change in capital stock is summarized as follows:











Nine months ended

August 31, 2016

August 31, 2015

(in thousands of Canadian dollars, except share amounts)


Shares


Stated value



Shares


Stated value











Class A Voting common shares


57,600

$



57,600

$











Class B Non-Voting shares











Balance, beginning of the period


79,517,587

$

481,265



85,703,751

$

517,467


Issued through dividend reinvestment plan


54,675


277



62,230


474


Stock options exercised





10,179


101


Repurchased for cancellation


(1,029,964)


(6,251)



(5,099,964)


(30,947)


Treasury stock purchased for employee benefit trust


(60,000)


(267)



(843,506)


(5,523)


Treasury stock issued for employee benefit trust


752,633


3,884



417,945


3,957


Balance, end of the period


79,234,931

$

478,908



80,250,635

$

485,529

 

(c)   Class B Non-Voting Shares Purchased for Cancellation

AGF has obtained applicable regulatory approval to purchase for cancellation, from time to time, certain of its Class B Non-Voting shares through the facilities of the TSX (or as otherwise permitted by the TSX). AGF relies on an automatic purchase plan during the normal course issuer bid. The automatic purchase plan allows for purchases by AGF of its Class B Non-Voting shares during certain pre-determined black-out periods, subject to certain parameters. Outside of these pre-determined black-out periods, shares will be purchased in accordance with management's discretion. Under its normal course issuer bid, AGF may purchase up to 10% of the public float outstanding on the date of the receipt of regulatory approval or up to 4,664,042 shares for the period from February 4, 2016 to February 3, 2017 and up to 6,707,999 shares for the period from February 4, 2015 to February 3, 2016. During the three and nine months ended August 31, 2016, under AGF's normal course issuer bid, 29,964 and 1,029,964 (2015 – 2,120,924 and 5,099,964) Class B Non-Voting shares were repurchased at a cost of $0.2 million and $5.3 million (2015 – $13.4 million and $36.5 million) and the excess recovered of $0.1 million and $1.0 million (2015 – $0.5 million and $5.5 million excess paid) over the recorded capital stock value of the shares repurchased for cancellation was recorded in retained earnings.

(d)   Class B Non-Voting Shares Purchased as Treasury Stock for Employee Benefit Trust

During the three and nine months ended August 31, 2016, nil and 60,000 (2015 – 600,000 and 843,506) Class B Non-Voting shares were purchased for the employee benefit trust at a cost of nil and $0.3 million (2015 – $3.7 million and $5.5 million). Shares purchased for the trust are also purchased under the Company's normal course issuer bid and recorded as a reduction to capital stock. During the three and nine months ended August 31, 2016, 37,443 and 752,633 (2015 – 37,925 and 417,945) Class B Non-Voting shares purchased as treasury stock were released. As at August 31, 2016, 448,128 (November 30, 2015 – 1,140,761) Class B Non-Voting shares were held as treasury stock.

Note 10: Accumulated Other Comprehensive Income













 

(in thousands of Canadian dollars)


Foreign

currency

translation



Available

for sale

securities



 

Cash flow

hedge



Total













Opening composition of accumulated other













comprehensive income (loss) at November 30, 2014













Accumulated other comprehensive income (loss)

$

9,342


$

3,512


$

(2,315)


$

10,539


Income tax recovery (expense)




(57)



614



557

Balance, November 30, 2014


9,342



3,455



(1,701)



11,096













Transactions during the year ended November 30, 2015













Other comprehensive income


12,366



735



800



13,901


Income tax expense




(51)



(212)



(263)

Balance, November 30, 2015


21,708



4,139



(1,113)



24,734













Transactions during the period ended August 31, 2016













Other comprehensive income (loss)


(15,056)



1,418



1,514



(12,124)


Income tax expense




(132)



(401)



(533)

Balance, August 31, 2016

$

6,652


$

5,425


$


$

12,077

 

Note 11: Fair Value Adjustments and Other Income













Three months ended August 31,

Nine months ended August 31,

(in thousands of Canadian dollars)



2016


2015


2016


2015











Fair value adjustment related to











investment in AGF mutual funds


$

902

$

(1,738)

$

509

$

(832)

Fair value adjustment and distributions related to











long-term investments



2,197


8,009


6,187


11,598

Interest income



101


122


523


914

Other



284


(52)


1,231


(6)



$

3,484

$

6,341

$

8,450

$

11,674

 

Note 12: Expenses by Nature
















Three months ended August 31,


Nine months ended August 31,

(in thousands of Canadian dollars)



2016



2015



2016



2015














Selling, general and administrative














Employee benefit expense


$

30,041


$

25,773


$

87,895


$

80,683


Restructuring expense





4,418





4,418


Sales and marketing



3,344



3,780



8,518



10,060


Information technology and facilities



9,116



6,543



24,046



18,224


Professional fees



4,771



4,027



13,685



11,747


Fund absorption and other fund costs



3,978



4,483



14,035



12,913


Other



1,145



1,062



3,494



3,390



$

52,395


$

50,086


$

151,673


$

141,435

 

Note 13: Stock-based Compensation and Other Stock-based Payments

(a)   Stock Option Plans

Under the Company's stock option plans, an additional maximum of 845,353 Class B Non-Voting shares could have been granted as at August 31, 2016 (November 30, 2015 – 2,293,337).

The change in stock options during the nine months ended August 31, 2016 and August 31, 2015 is summarized as follows:











Nine months ended


August 31, 2016



August 31, 2015








Weighted





Weighted





average





average



Options


exercise price



Options


exercise price











Class B Non-Voting share options











Balance, beginning of the period


6,102,781

$

10.69



4,428,542

$

12.86


Options granted


1,610,394


4.59



1,735,122


8.01


Options forfeited


(159,865)


11.68



(111,938)


14.82


Options expired





(321,536)


14.72


Options exercised





(10,179)


8.93


Balance, end of the period


7,553,310

$

9.37



5,720,011

$

11.25

 

During the three months ended August 31, 2016, nil (2015 – nil) stock options were granted and compensation expense and contributed surplus of $0.3 million (2015 – $0.4 million) was recorded. During the nine months ended August 31, 2016, 1,610,394 (2015 – 1,735,122) stock options were granted and compensation expense and contributed surplus of $1.1 million (2015 – $1.0 million) was recorded. The fair value of options granted during the nine months ended August 31, 2016 has been estimated at $0.52 per option (2015 – $1.32 to $1.40) using the Black-Scholes option-pricing model. The following assumptions were used to determine the fair value of the options granted during the nine months ended August 31, 2016 and August 31, 2015:











Nine months ended


August 31, 2016



August 31, 2015











Risk-free interest rate




0.6%





0.7%

Expected dividend yield




7.0%





3.9% – 4.1%

Five-year historical-based











expected share price volatility




30.5%





28.3% – 33.1%

Forfeiture rate




5.0%





5.1% – 5.2%

Option term




5.0 years





5.0 years

 

(b) Other Stock-based Compensation

Other stock-based compensation includes Restricted Share Units (RSUs), Performance Share Units (PSUs), Deferred Share Units (DSUs) and Partners Incentive Plan (PIP). Compensation expense for the three and nine months ended August 31, 2016 related to these share units was $1.0 million and $2.7 million (2015 – $0.8 million and $3.5 million). As at August 31, 2016, the Company recorded a liability of $1.4 million (November 30, 2015$1.8 million) related to other cash-settled stock-based compensation. As at August 31, 2016, the Company recorded contributed surplus of $7.4 million (November 30, 2015$9.4 million), net of tax, related to equity-settled RSUs and PIP.

The change in share units of RSUs, PSUs and DSUs during the nine months ended August 31, 2016 and August 31, 2015 is as follows:











Nine months ended


August 31, 2016



August 31, 2015


Number of share units


Number of share units

Outstanding, beginning of the period











Non-vested



1,149,063




1,662,193

Issued











Initial grant



884,751




694,741


In lieu of dividends



76,585




88,364

Settled in cash



(77,868)




(36,106)

Settled in equity




(49,749)





(417,945)

Forfeited and cancelled




(55,993)





(158,655)

Outstanding, end of the period




1,926,789





1,832,592

 

Note 14: Income Tax Expense 

Income tax expense is recognized based on management's best estimate of weighted average annual income tax rate expected for the full financial year. The estimated effective tax rate for the nine months ended August 31, 2016 was 22.2% (2015 – 25.0%).

During the nine months ended August 31, 2016, the Company recorded a tax contingencies expense of $1.5 million (2015 – $1.1 million) with respect to the Canada Revenue Agency (CRA) transfer pricing audit. Excluding the tax contingencies, the estimated effective tax rate for the nine months ended August 31, 2016 was 17.9% (2015 – 22.9%). Refer to Note 19 for additional information on tax contingencies.

Note 15: Earnings per Share


















Three months ended August 31,


Nine months ended August 31,

(in thousands of Canadian dollars, except per share amounts)



2016




2015




2016




2015

















Numerator

















Net income for the period from continuing operations


















attributable to the equity owners of the Company


$

8,143



$

11,880



$

27,973



$

40,105


Net loss for the period from discontinued operations


















attributable to the equity owners of the Company



(34)







(140)





Net income for the period attributable to the


















equity owners of the Company



8,109




11,880




27,833




40,105

















Denominator

















Weighted average number of shares – basic



79,296,221




82,826,845




79,332,129




83,053,317


Dilutive effect of employee stock-based compensation awards



1,009,920




987,220




791,526




1,085,366


Weighted average number of shares – diluted



80,306,141




83,814,065




80,123,655




84,138,683

















Basic earnings per share

















Continuing operations


$

0.10



$

0.14



$

0.35



$

0.48


Discontinued operations














$

0.10



$

0.14



$

0.35



$

0.48

















Diluted earnings per share

















Continuing operations


$

0.10



$

0.14



$

0.35



$

0.48


Discontinued operations














$

0.10



$

0.14



$

0.35



$

0.48

 

Note 16: Dividends

During the three and nine months ended August 31, 2016, the Company paid dividends of $0.08 and $0.24 (2015 – $0.08 and $0.43) per share. Total dividends paid, including dividends reinvested, in the three and nine months ended August 31, 2016 were $6.3 million and $19.0 million (2015 – $6.5 million and $36.1 million). On September 27, 2016, the Board of Directors of AGF declared a quarterly dividend on both the Class A Voting common shares and Class B Non-Voting shares of the Company of $0.08 per share in respect of the three months ended August 31, 2016, amounting to a total dividend of approximately $6.3 million. These condensed consolidated interim financial statements do not reflect this dividend payable.

Note 17: Related Party Transactions

The Company is controlled by Blake C. Goldring, Chairman and Chief Executive Officer of AGF, through his indirect ownership of all the voting shares of Goldring Capital Corporation, which owns 80% of the Company's Class A Voting common shares. The remaining 20% of the Class A Voting common shares are held by the Vice-Chairman of AGF, who is also a Director.

The remuneration of Directors and other key management personnel of AGF is as follows:


















Three months ended August 31,


Nine months ended August 31,

(in thousands of Canadian dollars)



2016




2015




2016




2015

















Salaries and other short-term employee benefits


$

1,352



$

2,216



$

3,643



$

5,019

Share-based payments



346




63




1,390




1,103



$

1,698



$

2,279



$

5,033



$

6,122

 

Note 18: Fair Value of Financial Instruments

Financial assets are classified as FVTPL, available for sale, or loans and receivables. Financial liabilities are classified as FVTPL, other liabilities, or derivatives used for hedging.

The carrying value of accounts receivable and other assets, accounts payable and accrued liabilities and long-term debt approximate fair value.

The table below analyzes financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1 

Quoted prices (unadjusted) in active markets for identical assets and liabilities,



Level 2   

Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly
(that is, derived from prices), and



Level 3     

Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs).

 

The following table presents the group's assets and liabilities that are measured at fair value at August 31, 2016:













(in thousands of Canadian dollars)












August 31, 2016

Level 1


Level 2

Level 3



Total













Assets












Financial assets at fair value through profit or loss













Cash and cash equivalents

$

58,563


$


$


$

58,563


AGF mutual funds and other


15,491







15,491


Equity securities


597







597


Long-term investments






84,281



84,281

Available for sale













Equity securities and term deposits


6,803







6,803

Loans and receivables













Canadian government debt – Federal




310





310

Total financial assets

$

81,454


$

310


$

84,281


$

166,045













Liabilities












Financial liabilities at fair value through profit or loss













Contingent consideration payable

$


$


$

2,019


$

2,019

Total financial liabilities

$


$


$

2,019


$

2,019

 

The following table presents the group's assets and liabilities that were measured at fair value at November 30, 2015:













(in thousands of Canadian dollars)












November 30, 2015

Level 1


Level 2

Level 3



Total













Assets












Financial assets at fair value through profit or loss













Cash and cash equivalents

$

48,669


$


$


$

48,669


AGF mutual funds and other


17,201







17,201


Equity securities


531







531


Long-term investments






140,534



140,534

Available for sale













Equity securities


5,385







5,385

Loans and receivables













Canadian government debt – Federal




310





310

Total financial assets

$

71,786


$

310


$

140,534


$

212,630













Liabilities












Financial liabilities at fair value through profit or loss













Contingent consideration payable

$


$


$

1,990


$

1,990

Derivatives used for hedging




1,763





1,763

Total financial liabilities

$


$

1,763


$

1,990


$

3,753

 

The fair value of financial instruments traded in active markets is determined using the quoted prices where they represent those at which regularly and recently occurring transactions take place.

Level 1 instruments include listed equity securities on major exchanges, investments in AGF mutual funds, highly liquid temporary deposits with an Irish bank and non-Irish banks in Ireland, as well as Singapore bank term deposits.

Level 2 instruments include derivative instruments with major Canadian chartered banks and Canadian federal government debt. The fair value of derivatives used to manage interest rate exposure on deposits and long-term debt is calculated through discounting future expected cash flows using the BA-based swap curve. Since the BA-based swap curve is an observable input, these financial instruments are considered level 2. Canadian federal government debt is measured at amortized cost and its fair value approximates its carrying value due to its short-term nature.

Level 3 instruments include long-term investments related to the alternative asset management platform and contingent consideration payable. Instruments classified in this category have a parameter input or inputs that are unobservable and that have a more than insignificant impact on either the fair value of the instrument or the profit or loss of the instrument. The fair value of the long-term investments is calculated using the Company's percentage ownership and the fair market value of the investment derived from financial information provided by investees. The fair value of the Company's investment in EIF as at August 31, 2016 has been estimated using the net asset value (NAV) as calculated by the asset manager of the fund, adjusted to reflect the Company's agreement to limit its initial return to a specified maximum percentage on the portion of its interest that it expects to be sold to new investors upon the final close of the fund. The fair value of the Company's investment in the Stream fund is determined using NAV as calculated by the asset manager. If the NAV were to increase or decrease by 10%, the fair value of the Company's long-term investment and pre-tax income would increase or decrease by $3.0 million. Refer to Note 5(c) for additional information.

Contingent consideration payable is determined based on the present value of the expected payment to the sellers of FFCM, if the annualized advisory revenue in 2018 exceeds certain thresholds. Refer to Note 6 for additional information.

The following table presents changes in level 3 instruments for the nine months ended August 31, 2016:







(in thousands of Canadian dollars)





Contingent



Long-term



consideration



investments



payable







Balance at December 1, 2015

$

140,534


$

1,990


Purchase of investment


40,702




Return of capital


(93,129)




Fair value adjustment recognized in profit or loss


(3,826)



29

Balance at August 31, 2016

$

84,281


$

2,019

 

The following table presents changes in level 3 instruments for the nine months ended August 31, 2015:







(in thousands of Canadian dollars)





Long-term






investments







Balance at December 1, 2014




$

19,671


Purchase of investment, net of return of capital





110,727


Fair value adjustment recognized in profit or loss





3,420


Reclassification of investment





(63)

Balance at August 31, 2015




$

133,755

 

There were no transfers into or out of level 1 and level 2 during the nine months ended August 31, 2016.

Note 19: Tax Contingencies

The Company believes that it has adequately provided for income taxes based on all of the information that is currently available. The calculation of income taxes in many cases, however, requires significant judgement in interpreting tax rules and regulations. The Company's tax filings are subject to audits, which could materially change the amount of the current and deferred income tax assets and liabilities, and could, in certain circumstances, result in the assessment of interest and penalties.

The Company has several ongoing disputes with the CRA, of which the final result of the audit and appeals process may vary and may be materially different compared to the estimates and assumptions used by management in determining the Company's consolidated income tax provision and in determining the amounts of its income tax assets and liabilities.

(a) CRA Audit – Transfer Pricing

During the period November 30, 2013 to August 31, 2016, the Company has received a number of notices of reassessment (NOR) from the CRA for its 2005 through 2010 fiscal years relating to the transfer pricing and allocation of income between one of the Company's Canadian legal entities and a foreign subsidiary. These reassessments would increase the Company's taxes payable (including interest and penalties of $32.2 million), net of estimated relief from double taxation of $21.4 million, from its original tax filings by $71.9 million. Any Competent Authority relief from double taxation should be granted at the completion of the mutual agreement procedures (MAP) under the applicable tax treaty.

The Company strongly disagrees with the CRA's position and filed various objections to the NOR for the taxation years 2005 to 2010. In connection with the filing of an objection to the NORs for the applicable periods 2005 through 2010, the Company has paid approximately $60.1 million ($62.1 million paid, net of $2.0 million of interest relief refunded by CRA) of which $8.1 million was paid (including interest and penalties) during the nine months ended August 31, 2016 in relation to the 2009 and 2010 NORs.

In consultation with its external advisors, the Company believes that its transfer pricing methodology was reasonable and the Company is contesting the CRA's position and any related transfer pricing penalty. The Company believes it is likely that the CRA will reassess its taxes for subsequent years on a similar basis and that these may result in future cash payments on receipt of the reassessments. During the nine months ended August 31, 2016, the Company has recorded a tax expense of $1.5 million (2015 – $1.1 million) in relation to this transfer pricing audit. The amount of tax provision recorded on the consolidated interim statement of financial position reflects management's best estimate on the ultimate resolution of this matter and includes any related estimated interest and penalties for the 2005 to 2016 fiscal years.

In 2013, the Company was accepted by the CRA into a Bilateral Advance Pricing Arrangement (BAPA) between Canada and the relevant tax authorities to establish the appropriate transfer pricing methodologies for the tax years 2011 through 2016. Under a BAPA, the taxpayer will receive certainty as to its transfer pricing arrangements for the years under consideration, will not be assessed transfer pricing penalties, and can avoid double taxation on transactions covered by the BAPA according to the provision of the income tax treaty between Canada and the foreign country.

(b) CRA Audit – Foreign Accrual Property Income

During the quarter ended August 31, 2016, CRA notified the Company of the completion of the audit for the 2008 to 2012 fiscal years with no adjustments.

(c) CRA Audit – Acquisition of Tax-related Benefits

In July 2015, the Company received a NOR from the CRA denying $30.5 million of tax-related benefits acquired and utilized by the Company in the 2005 fiscal year. The NOR would increase the Company's taxes payable from its original tax filings by $10.9 million (before the application of interest and penalties of $9.7 million). The Company strongly disagrees with the CRA's position and has filed an objection to the NOR. As a result of receiving the NOR, the Company paid $13.5 million (including interest and penalties) during the year ended November 30, 2015, which was recorded as income tax receivable on the consolidated interim statement of financial position. In consultation with its external advisors, the Company believes that its tax position is probable of being sustained and, as a result, has not recorded a provision in relation to this matter.

This report contains forward-looking statements with respect to AGF, including its business operations, strategy, financial performance and condition. Although management believes that the expectations reflected in such forward-looking statements are reasonable, such statements involve risks and uncertainties. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause results to differ materially include, among other things, general economic and market factors including interest rates, business competition, changes in government regulations or in tax laws, and other factors discussed in materials filed with applicable securities regulatory authorities from time to time.

SOURCE AGF

For further information: AGF Management Limited shareholders, analysts and media, please contact: Adrian Basaraba, Senior Vice-President and Chief Financial Officer, 416-865-4203, Adrian.Basaraba@agf.com; Adam Cohen, Director, Finance and Investor Relations, 416-865-4228, Adam.Cohen@agf.com

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